Dudley Metropolitan Borough Council, R (on the application of) v Secretary of State for Communities and Local Government [2012] EWHC 1729 (Admin)

[2012] EWHC 1729 (Admin)

Case No CO/6906/2011

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

ADMINISTRATIVE COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 25 June 2012

Before

THE HONOURABLE MR JUSTICE SINGH

Between

THE QUEEN ON THE APPLICATION OF DUDLEY METROPOLITAN BOROUGH COUNCILClaimant

SECRETARY OF STATE FOR COMMUNITIES AND LOCAL GOVERNMENTDefendant

Peter Oldham QC (instructed by The Solicitor, Dudley Metropolitan Borough Council) for Claimant

Paul Nicholls QC (instructed by The Treasury Solicitor) for Defendant

Hearing Hearing dates: 9 and 10 May 2012

Judgment

Introduction

[1]By this claim for judicial review the claimant local authority seeks to challenge the defendant’s decision of 19 April 2011, which is described in the claim form as the “withdrawal of the claimant’s declining balance PFI [i.e. Public Finance Initiative] grant.” The defendant is now the Secretary of State for Communities and Local Government but, during the relevant period, his title, and that of his department, has changed from time to time. Since nothing turns on those changes, I will, for convenience, refer to “the Secretary of State” or “the defendant’s department.”

[2]Permission to bring this claim for judicial review was granted on 6 September 2011 by HH Judge David Cooke (sitting as a Judge of the High Court).

[3]The challenge relates to the decision by the defendant to change the way in which he would make payments under the PFI scheme in respect of a project for information communication technology (ICT) in schools in the claimant’s administrative area, known as Dudley Grid For Learning (DGFL). From 1999 until 2011 the claimant’s grant was paid on what is known as the “declining balance” basis. The decision under challenge changed that to an “annuity” basis.

[4]By the time of the hearing before me the claimant advanced the following five grounds in support of its challenge (although they were presented in a slightly different order):(1) Breach of the duty to consult, alternatively the procedural expectation of consultation.

(2) Breach of a substantive legitimate expectation.

(3) Application of a rigid and inflexible policy.

(4) Failure to take relevant facts into account/error of fact.

(5) Breach of section 149 of the Equality Act 2010, sometimes known as the Public Sector Equality Duty.

Factual Background

[5]By a letter dated 5 June 1998 the defendant’s department notified the claimant authority that it would receive a special grant under the PFI scheme. The letter enclosed a copy of Special Grant Report (Number 35), which was laid before the House of Commons on 21 May 1998 and was to be debated in the House on 18 June. That report was made by the Secretary of State under section 88B of the Local Government Finance Act 1998 (which I will set out later). The purpose of the Special Grant was: “To assist local authorities in England to meet that part of their expenditure incurred under transactions under the Private Finance Initiative which is attributable to the capital element of project costs and is defrayed (on or before 12 March 1999) in the Financial Year 1998/99.” (paragraph 4) Annex A to the report set out a list of the authorities to which the grants were to be paid, which included the claimant authority. Annex B set out the method by which the amount of the grants payable to authorities would be calculated. It is unnecessary to go into the details of the formula used at paragraphs 4 and 5 of that Annex but it is common ground that the formula led in essence to the declining balance basis. At the risk of over-simplification, this means that the capital cost associated with a project, which is paid by a local authority during the term of a contract with a third party (e.g. the private entity which builds a school or installs ICT), is defrayed by the Secretary of State not by annual payments during the term of the contract, but over a much longer timeframe, in theory extending to 100 years or even longer. In the short term, this means that the local authority has to find the funds to make up any shortfall in a given year during the term of the contract but, in the longer term, it continues to receive funds from the Secretary of State for many years after the end of that contractual term.

[6]The way in which the PFI grant was payable to the claimant in respect of the DGFL project is described in the following way by Iain Newman, employed by the claimant as its Treasurer, in his first witness statement, at paras. 9-10:

“9. Under a PFI arrangement, revenue support grant is receivable from Central Government by way of a series of annual revenue payments to meet the capital debt agreed for PFI funding, rather than the capital debt being funded up front by the Government in one or two grant payments at the start of the project. This means that capital funding is required up front to meet initial outlay, and in recognition of this process the Government makes annual payments to the Council to cover the capital debt agreed for PFI funding (referred to as principal repayments) and also an element of interest to cover the financing of the initial outlay. 10. Although the DGFL contract required payments to be made to the contractor of £51.5m over a 10 year term, the payment flows from Government were to be over a much longer period, in theory ad infinitum due to the reducing nature of the annual declining balance payments. In broad terms the arrangements were as follows:- i. The ODPM [Office of the Deputy Prime Minister, as the defendant’s department was known at that time] approval was for PFI funding to pay capital costs of £29.5m. ii. The payment flows in respect of the £29.5m were by the declining balance basis at a standard rate of interest, where the interest is fixed at the point of contract signing, thus removing from the Council the risk of changing interest rates. iii. The declining balance basis equates to annual repayments of principal based on 4% of the debt outstanding at the beginning of the financial year. Thus a reducing balance each year means a reduced annual repayment if the percentage applied is fixed. This provides for annual repayments which actually extend for over hundreds of years, though in practice people often think in terms of a 100 year period since after that date the sums involved are small. For example to repay £29.5m debt to the Council, the principal repayments commenced in 1999/2000 at £1.2m pa, by 2005/06 were £0.9m pa, by 2010/11 were £0.7m pa, by 2017/18 would have been £0.6m pa, by 2099/2100 would have been £0.020m pa with debt still outstanding at that point of £0.5m, and by the year 2199 just £380 pa but with debt still outstanding of £9,000 etc.” i. The ODPM [Office of the Deputy Prime Minister, as the defendant’s department was known at that time] approval was for PFI funding to pay capital costs of £29.5m. ii. The payment flows in respect of the £29.5m were by the declining balance basis at a standard rate of interest, where the interest is fixed at the point of contract signing, thus removing from the Council the risk of changing interest rates. iii. The declining balance basis equates to annual repayments of principal based on 4% of the debt outstanding at the beginning of the financial year. Thus a reducing balance each year means a reduced annual repayment if the percentage applied is fixed. This provides for annual repayments which actually extend for over hundreds of years, though in practice people often think in terms of a 100 year period since after that date the sums involved are small. For example to repay £29.5m debt to the Council, the principal repayments commenced in 1999/2000 at £1.2m pa, by 2005/06 were £0.9m pa, by 2010/11 were £0.7m pa, by 2017/18 would have been £0.6m pa, by 2099/2100 would have been £0.020m pa with debt still outstanding at that point of £0.5m, and by the year 2199 just £380 pa but with debt still outstanding of £9,000 etc.”

[11]In a witness statement filed on behalf of the defendant by John Garrity (Head of the Central PFI Unit at the defendant’s department), the difference between the declining balance basis and the annuity basis is explained as follows, at paras. 27-31:

“27. Both the declining balance and annuity grant mechanisms use the PFI credit as the basis for generating payments. Under the declining balance system, payments have been calculated based on paying each year a percentage of the PFI credit, as determined by the Government, and a figure for interest on the PFI credit. The interest rate is set each year by the Government for projects approved in that year. 28. Under the annuity system, payments are generated based on the credits issued in order to pay for the supported capital element of the charge paid by the authority to the private sector provider. Under the annuity system, the Government pays for the supported capital element of the authority’s payments over the duration of the contract. Therefore if the authority has entered into a 10 year contract, the Government will pay a sum equal to the full supported amount of the authority’s payments for the private sector provider’s investment in the capital asset over the duration of the contract. Under the annuity system, the period of time over which the Government makes payment of PFI special grant is the same as the period of time over which the authority pays its unitary charge to the private sector provider. 29. This reflects an important difference between the annuity system and the declining balance system. Under the annuity based system of payment, the Government makes payment for the authority’s supported capital payments over the lifetime of the contract. 30. Under the declining balance system of payment, payments made by Government do not provide PFI grant which is co-extensive with the authority’s obligation to contribute to capital investment over the period of the contract. The Government’s contribution does pay towards the capital element sum, but over a longer period. This means that where the declining balance system of payment is used, the authority will have to identify other additional sources of funding for part of the capital element of the charge it pays over the contract period, as well as for the service element (which is not, in any event, paid for by means of payments under the PFI grant system). 31. Both the declining balance system and the annuity system are methods of achieving the same result, namely the provision by Government to cover the supported costs of capital investment.”

[12]Returning to the chronology of events, in a letter dated 17 June 1998 the Chief Finance Officer of the claimant authority wrote to the Treasury, pointing out that the then current system of funding PFI projects might be sustainable in relation to long contracts of a building nature but was not, in the author’s view, sustainable in relation to short projects like the education ICT project in Dudley. In its reply of 23 June 1998 the Treasury accepted that it was correct that there was:

“a mismatch between the way in which additional RSG [Rate Support Grant] flows, following issue of a notional credit approval, and the profile of payments under a PFI contract; and these problems are exacerbated in your case due to the relatively short life of the proposed contract.”

However, the letter went on to state that the author saw little prospect of the current arrangements being changed in time for the claimant’s contract. It mentioned that the department had recently issued a consultation paper on capital finance in local authorities which identified this as an issue but changes were only likely to emerge on a longer timescale than would help in relation to the Dudley ICT contract.

[13]On 12 January 1999 the Department for Education and Employment wrote to the claimant authority in respect of the DGFL PFI Services contract of the same date. The letter confirmed that the Department had decided to issue a notional credit approval for that project and that the credit given in respect of the allocation for the current Financial Year would be for an amount of £25.84 million. The letter continued:

“With regard to the details of revenue support, you will be aware that on 19 November 1997 the Government announced new arrangements to boost the development of PFI projects. This indicated that Special Grant arising from PFI Credits will be available to support expenditure by authorities in the first year in which payments under the PFI contract begin. This Special Grant will be payable at the same rates as would apply were support to be given as Revenue Support Grant (RSG). It is expected that support for PFI projects in later years will normally be through RSG. This Credit will be taken into account in the Special Grants calculations for the Local Government Finance Settlement for the financial year 1998/99 and for the calculation of subsequent payments of Revenue Support Grant. Details of the Special Grant regime for 1998/99 and how your authority should calculate and apply for the amounts due are set out in Special Grant Report (number 35), which was laid before the House of Commons on 21 May 1998 and approved by it on 18 June. ……your authority will, of course, need to ensure that funds are available to cover that part of the payments to the contractor which will not be met out of this support.”

[14]By a similar letter dated 5 November 1999 the Department for Education and Employment confirmed that there would be an additional notional credit approval in the amount of £3.71 million in respect of former Grant Maintained Schools in the claimant’s area. This led to a total of £29.55 million.

[15]Between 2000 and 2003 there were annual determinations of the grant payable to the claimant authority under section 88B of the Local Government Finance Act 1988. These were all on the declining balance basis. Indeed, at that time, that was the only basis on which PFI grants were available from the Secretary of State.

[16]On 29 July 2004 the defendant’s department wrote to Chief Executive Officers and Directors of Finance at local authorities in England to announce a consultation paper on PFI Grant reform. The letter stated that the basic framework had been agreed in the light of the 2004 Spending Review. This would be to move to an “annuity based system”, i.e. a constant grant payment over the period of the relevant PFI contract. The letter continued to state that, however, decisions had yet to be taken on the details of several areas and the recipients’ views were sought. In particular views were sought on whether the relevant authority wished to switch to receiving support under the proposed new system.

[17]By an e-mail dated 4 January 2005 Catherine Ludwig, the Group Accountant -Special Projects in the claimant’s corporate finance department, wrote a note to the defendant’s department raising a number of queries relating to the proposed annuity basis. Paragraph 3 of her note stated that the DGFL was 10 years in length, which matches the standard length for ICT schemes. “However, the contract provides for a 2-year extension at the end of the 10-year period, on the same basis as the current contract. How could the annuity basis accommodate this? (If it can)” Paragraph 8 of the same note stated:

“It seems that by moving to the annuity basis authorities are receiving more funding during the life of the project but are forgoing later receipts, that are in some cases (like our 10-year ICT scheme) quite substantial and might well have been earmarked for continuation of the service at some level. Is consideration being given to maintenance of service after the contract term, and what financial arrangements might apply? This particularly applies to our schools ICT, for primary schools and now also for our secondary schools as we have learnt that we are not in the next two waves of funding for Building Schools for the Future.”

[18]In an e-mail of 18 January 2005, which replied to that note, Ayoola Ladega, an official at the defendant’s department, said that there would be more information on the possible effects of a switch to the annuity basis, payment length etc when the results of the consultation process were announced.

[19]By a letter dated 22 April 2005 it was announced that the amount payable from 2005/06 would be in accordance with determinations made by the Secretary of State. Some of those determinations would be on the new annuity method of calculation under Determination (1) 2005 [31/128] but there would be projects remaining with the declining balance method under Determination (1) 2005 [31/133]. In the case of the claimant’s DGFL project, payment continued to be made on the declining balance basis for the years from 2005.

[20]On 5 November 2008 the claimant agreed a two year extension of its ICT contract (known as DGFL 2) for the period 31 January 2009 to 31 January 2011. This was permissible under the contract but no further extensions were permitted under it.

[21]By an e-mail dated 4 January 2011 Ayoola Ladega wrote to relevant local authorities to state that:

“The Department for Communities and Local Government is intending to change the way PFI grant is calculated for those projects currently on the declining balance method of calculation from April 2011 onwards. As part of that process a letter highlighting the proposed change and how that change will affect each project currently being paid grant based on this method will be sent to all Chief Finance Officers in the authorities concerned. …..”

[22]In an important letter dated 10 January 2011, which is central to the dispute before the Court, Michael Oliver of the defendant’s department wrote to the treasurer of the claimant authority in the following terms:

“I am writing with regard to the grant paid to your authority to support your Schools IT ‘Grid for Learning’ PFI project. This is currently calculated on a declining balance basis, the details of which can be found in the relevant 2010-11 determination…as a result of the choice you made in 2004 not to change to an annuity based grant. At a time when many aspects of Government expenditure have been under scrutiny, it has been decided that only annuity based PFI grant will be paid in future….The grant paid to you will therefore change from 2011-12. Under the annuity system projects are only paid support during the life of their contracts. Since the project ended in January 2009, you will not receive any grant in 2011-12. However, a one off final payment will be paid at the end of 2010-11. If the same methodology were used as in 2004 this would be £6,622,436, that being the amount necessary to bring the total paid up to that which you would have received if the project had been calculated on an annuity basis from the start. However, it has been agreed that you should not receive less than you expected over the next 4-year Spending Review period in real terms.”

There then followed a table the net result of which was that the claimant authority would be paid £8,300,787. (It was later agreed that this was an inaccurate figure and it was adjusted upwards.) The letter concluded by saying:

“Please contact Ayoola Ladega….by 10 February if you have any queries or if this change will create any major difficulty for you, and we will consider whether there are any options which could help.”

[23]By a letter dated 13 January 2011 the leader of the Council, Councillor Anne Millward, wrote to Ayoola Ladega to complain about the change which had been announced. She referred in some detail to the chronology, in particular from 2004, when a choice had been permitted, and made, to remain with the declining balance method of payments. She also stated:

“On the basis on the continuation of this grant we have extended the original contract by 2 years from 2009 and have now undergone an extensive 12 month OJEU [Official Journal of the European Union] compliant procurement process, with the PFI credits grant being fundamental to the financial affordability. At all times Partnership for Schools were fully informed of our progress. Following the procurement exercise outlined we are due to start a new 10-year contract imminently. This will provide ICT that is embedded within teaching and learning across 108 of Dudley’s schools and education establishments. At no point between 2005 and now have we been made aware that the declining balance option for our PFI credits grant could be withdrawn. The withdrawal of the grant jeopardises our contract and therefore ICT provision with Dudley’s schools and other education establishments. The procurement process and the award of the new contract from 1 February 2011 have been based on out legitimate expectation that the Government would pay our full PFI Grant. The offer of £8,300,787 (Grant in real terms) means that we have a shortfall in funding for the contract we have procured over 10-years of £11,096,009. Furthermore, your letter of 10th January is incorrect when it states our project ended in 2009. … It is of the utmost importance, therefore, that the Minister reconsiders this position as a matter of urgency and reinstates the full amount of grant.”

[24]In a letter dated 7 February 2011 the Parliamentary Under-Secretary of State at the defendant’s department, Bob Neill MP, wrote to Margot James MP, the local Member of Parliament, to note that they had had a meeting on 19 January 2011. The letter continued:

“At our meeting, I said we would discuss the issues raised with the Department of Education. My officials are now in discussion with them. I understand that you may have also been in touch with Lord Hill on this matter. [Lord Hill was a Minister at the Department of Education]. More widely, we are consulting on the ‘declining balance’ issue with other local authorities and this consultation is due to close on 10 February. I will write to you again when I have considered all of the responses to this consultation.”

[25]In a letter dated 3 February 2011 Michael Oliver from the defendant’s department wrote to Councillor Millward. He said:

“Ministers will be considering the points raised in your letter [of 13 January 2011] and those made at the subsequent meeting with Bob Neill on 19 January alongside other local authority responses on this issue. The consultation is due to close on 10 February. If Dudley MBC decides to proceed with the new contract before we respond substantively, you should not assume that you will receive more than the £8,300,787 mentioned in the letter of 6 January.”

[26]In an e-mail dated 22 February 2011 it was accepted by Michael Oliver that there had been an incorrect figure in the letter of 10 January, and the revised figure for the cash difference the defendant would pay was £8,939,513. A letter of 31 March 2011 made it clear that this figure would be paid on the same date. That letter said:

“This is without prejudice to the concerns already raised as part of the consultation process, and to which we have yet to respond.”

[27]By a letter dated 19 April 2011 Michael Oliver for the defendant’s department wrote to Councillor Millward to let her know of the relevant Ministers’ decision. He said:

“Following consultation and careful consideration of Dudley’s case, Ministers decided to confirm the decision to end PFI grant payments on a declining balance basis. They have concluded that it is not sustainable to continue with such never ending financial commitments, especially in the current fiscal climate. However, it is recognised that before learning of the possible change to the Government’s policy Dudley incurred significant expenditure in the run up to agreeing a new PFI contract and DCLG is prepared to meet these costs. I will be in touch … to agree the appropriate amount to be paid. We have already made a lump sum payment of £8,939,513 to Dudley at the end of March representing the amount of PFI grant Dudley would have expected to receive over the course of the whole 2011 Spending Review period until 2015. I know that you will be disappointed with this decision, but given the need to end PFI grant payments on the declining balance basis, Ministers believe this approach is fair to Dudley.”

It is that decision which is the subject of challenge in the present claim for judicial review.

Financial consequences for the claimant of the defendant’s decision

[28]There was a dispute at the hearing before me about the financial consequences for the claimant authority of the defendant’s decision to change from the declining balance basis to the annuity basis.

[29]At paras. 53-56 of his first witness statement, Mr Newman sets out his understanding of those financial consequences in the following way:

“53. The funding arrangement agreed in 1998 was for the debt of £29.5m to be repaid over many years with interest. If the DCLG kept to that arrangement, the total amount payable to the Council, assuming (in the DCLG’s favour) a cut off after 100 years, would be £93m. Therefore as at 31st March 2011 DCLG had paid the Council a total of £45.2m, leaving a shortfall of £47.8m, against the 1998 agreement to include principal and interest. 54. In net present value terms, the loss of income due from 2011/12 to 2098/99 of £56m when applying an annual discount rate of 4% to 2011/12 value equates to a net present value of £30m. This compares with the ‘one off settlement’ offered on 31 March 2011 of £8,939,513. Therefore the NPV loss is approximately £21m at 2011/12. … 56. In any event, the figures above show that the sums paid do not fully reimburse the Council for the original 1998 debt agreement of £29.5m; it is short by £9.2m.”

[30]On behalf of the defendant it is not accepted that there has been any adverse financial consequence for the claimant. Mr Garrity says, at para. 67 of his witness statement that:

“the Government made a one-off payment which had the effect of ensuring that all projects which were switched from a declining balance based system of payment to an annuity based system of payment would receive payment at least equal to what they would have received if they had been paid under the annuity system from the outset. What I have described as the ‘eligible element’, i.e. that element which the Government had agreed to fund, was paid in full, even though the method of doing so changed.”

[31]At paras. 73-75, Mr Garrity explains that, although the Government did not consider itself to be under an obligation to support the capital element of ‘DGFL 2’, as it did not agree to fund that two year extension of the contract, it had in fact fully funded it. The Government continued payment on the declining balance basis until March 2011. He summarises what he understands to be the impact on the claimant as follows at para. 73 of his witness statement:

“… The disadvantage to Dudley of the switch from declining balance to annuity method of payment for the funding of the ‘eligible element’ of the original DGFL contract is that there is no longer a continuing stream of declining balance payments available to Dudley to use for purposes other than the original DGFL project. Dudley’s complaint is that it no longer has the benefit of declining balance funding which it can use for its new contract, referred to as DGFL3.”

[32]On behalf of the claimant Mr Newman does not accept that there has been no detriment to it. At para. 7 of his second witness statement he says:

“… The Council arranged its funding in respect of DGFL on the basis that PFI grant would be on a declining balance basis. This meant that it was paid less by the Government during DGFL 1 (and indeed DGFL 2) than it would have been paid had the funding been on an annuity basis throughout. The disadvantage of getting a longer term funding stream through a declining balance grant was that the Council had to contribute more to DGFL1 and 2 than it would have done had the same credit been realised by a grant on an annuity basis … But through a declining balance grant, the Council would have future long term funding for DGFL, after DGFL 1 and 2 were over.”

[33]At para. 21 of his second witness statement, Mr Newman sets out his response to the suggestion by Mr Garrity that the one-off payment made in 2011 means that the claimant is no worse off than it would have been:

“Mr Garrity seems to assume that the Council is no worse off because it has received the same amount of money (£45.2m) that it would have received on the annuity basis. This ignores the fact that money has a time value (reflected in the Defendant’s own methodology by the calculation of principal and interest) and that on the annuity basis £45.2m would have been paid earlier, with less interest accruing and with principal (i.e. the value of the Notional Credit Approval) paid in full. …”

[34]Mr Newman then exhibits some spreadsheets which show, he says, how the payment of £8.9m in 2011 by the defendant still left a shortfall of £9.2m principal.

[35]Following the hearing before me the parties submitted written notes regarding the financial position. The Secretary of State submitted that the effect of the move to the annuity basis for payment was that the claimant was paid in full, in cash terms, for the supported capital cost which the Secretary of State had agreed to fund by way of the PFI grant. The Secretary of State accepts that a consequence of the change to the basis for payment is that, having regard to the total payments which were and would have been made under the two systems, the claimant has received less in cash under the annuity system than it would have received under the declining balance system over its full term. Under the annuity system, the claimant has received £45.2 million by 31 March 2011. Under the declining balance system it would have received, by the year 2100, £92,595,549. The Secretary of State submits, however, that for the period to March 2015 the claimant has received more in cash terms than it would have received under the declining balance system. He also submits that there has been accelerated payment of this amount as it was paid in 2011 and not in the years leading up to 2015.

[36]It is not necessary for the purpose of determining the legal issues in the present case to decide whether the claimant or the defendant is correct as to the exact figures or on other economic matters. However, for that purpose it will suffice to note three things which appear to be clear even on the disputed state of the evidence.

[37]First, the Secretary of State accepts that he did not, in deciding the amount of the cash payments, make any adjustment to reflect the time value of money. Secondly, flowing from that fact, it is clear that the claimant feels a real sense of grievance. It feels that the decision under challenge has made a material impact on its finances for the foreseeable future. That is not just a subjective feeling: it is difficult to see why this dispute between two responsible public authorities would come to court if it were a merely fanciful grievance. This is reinforced by the third point. As the claimant pointed out in its reply to the defendant’s note, at para. 29(1), the whole point of the change in 2011 was to save the Government the “great expense” involved, as it was put at para. 45 of Mr Garrity’s witness statement. The claimant continues that:

“The only way in which the Government would save this expense is if new arrangements meant that the value of payments under the new arrangements was less than the value of the sums that it would have paid under the terms of the credit originally agreed. The Government’s gain and [the claimant’s] loss were the same thing. So it follows from [the defendant’s] reasons for the change that [the claimant] did not get the value of the original credit.”

[38]For present purposes, it does not, in my view, matter so much whether these points are accepted by the Secretary of State or not. What does matter is that they are the sort of points that the claimant would have wished to impress upon the Secretary of State if there had been consultation of the claimant before the decision under challenge was taken. I will return to the legal submissions about the asserted duty of consultation later.

Material Legislation

[39]Section 88B of the Local Government Finance Act 1988, so far as material, provides:

“(1) The Secretary of State may, with the consent of the Treasury, pay a grant (in this section referred to as a special grant) in accordance with this section to a relevant authority. … (4) A determination under subsection (2) or (3) above shall be made with the consent of the Treasury and shall be specified in a report (to be called a special grant report) which shall contain such explanation as the Secretary of State considers desirable of the main features of the determination. (5) A special grant report shall be laid before the House of Commons and, as soon as is reasonably practicable after the report has been so laid, the Secretary of State shall send a copy of it to any relevant authority to whom a special grant is proposed to be paid in accordance with the determination in the report. (6) No special grant shall be paid unless the special grant report containing the determination relating to the grant has been approved by a resolution of the House of Commons. …”

[40]During the years 1999 to 2004 the relevant special grants were made to the claimant authority under section 88B with the approval of the House of Commons. In subsequent years, although that provision remained in force, it was not in fact used in the present case and instead grants were made under section 31 of the Local Government Act 2003. This provides that:

“(1) A Minister of the Crown may pay a grant to a local authority in England towards expenditure incurred or to be incurred by it. …. (6) In the case of a grant to a local authority in England, the powers under this section are exercisable with the consent of the Treasury.”

[41]It will be noted that grants under section 31 of the 2003 Act do not require approval by resolution of the House of Commons.

[42]Section 149 of the Equality Act 2010, which has the side note ‘Public Sector Equality Duty’, provides as follows: “(1) A public authority must, in the exercise of its functions, have due regard to the need to –(a) eliminate discrimination … that is prohibited by or under this Act,

(b) advance equality of opportunity between persons who share a relevant protected characteristic and persons who do not share it,

(c) foster good relations between persons who share a relevant protected characteristic and persons who do not share it, … (3) Having due regard to the need to advance equality of opportunity … involves having due regard, in particular, to the need to – (a) remove or minimise disadvantages suffered. … (b) take steps to meet the needs of persons … (c) encourage persons … to participate in public life or in any other activity in which participation by such persons is disproportionately low. (4) The steps involved in meeting the needs of disabled persons that are different from the needs of persons who are not disabled include, in particular, steps to take account of disabled persons’ disabilities. (5) Having due regard to foster good relations … involves having due regard, in particular, to the need to - (a) tackle prejudice, and (b) promote understanding. (6) Compliance with the duties in this section may involve treating some persons more favourably than others. … (7) The relevant protected characteristics are – [there are then set out eight specific protected characteristics, which include race, sex and disability].” (a) eliminate discrimination … that is prohibited by or under this Act, (b) advance equality of opportunity between persons who share a relevant protected characteristic and persons who do not share it, (c) foster good relations between persons who share a relevant protected characteristic and persons who do not share it, … (a) remove or minimise disadvantages suffered. … (b) take steps to meet the needs of persons … (c) encourage persons … to participate in public life or in any other activity in which participation by such persons is disproportionately low. (a) tackle prejudice, and (b) promote understanding.

(a) The duty of consultation

[43]There are two bases on which the claimant argues that it was entitled to be consulted before the decision was taken to withdraw the PFI grant on a declining balance basis and to replace it with the annuity basis. The first is that it had a legitimate expectation that there would be consultation based on the defendant’s past practice. The second is that, quite apart from such a procedural expectation, the claimant had an expectation that its grant would continue to be paid on the declining balance basis and that fairness requires that, before it was withdrawn, it would be consulted on this issue.

[44]It is important to note that, in making the second of those arguments, the claimant for this purpose relies on its expectation not to argue that the defendant was not entitled to reach the decision he did at all (that is the subject of a separate ground, based on the doctrine of substantive legitimate expectation), but that, before he did so, he had to follow a fair procedure. In other words, for this purpose, the claimant submits that its expectation gave rise to procedural rights, not substantive rights.

[45]So far as the claimant’s first argument is concerned, in principle a legitimate expectation of consultation (i.e. a procedural expectation) can arise either from a promise that there will be consultation (see Attorney General of Hong Kong v Ng Yuen Shiu

[1983] AC 629

) or from a past practice of such consultation (see Council of Civil Service Unions v Minister for the Civil Service

[1985] AC 374

(the CCSU case). In the present case, the claimant did not suggest that there was any promise of consultation. However, it did contend that there had been a past practice of consultation.

[46]I am not persuaded by that argument. All that the claimant is able to rely on is the fact that in 2004 the Secretary of State did consult when consideration was given to introducing the annuity basis as an alternative to the declining balance basis. In my judgement, one incident of consultation of that type cannot amount to a practice of consultation such as to give rise to a legitimate expectation of such consultation in the future.

[47]However, the claimant’s second argument does not depend on either a promise or a past practice of consultation. The starting-point is that, if a decision-maker intends to take a decision which affects a person’s rights, the duty to act fairly (in earlier parlance “natural justice”) will usually be required by public law, which will imply such a duty into a statutory scheme even when none is expressly laid down: see e.g. Lloyd v McMahon

[1987] AC 625

, at 702-3 (Lord Bridge of Harwich).

[48]It was recognised as long ago as Schmidt v Secretary of State for Home Affairs

[1969] 2 Ch 149

, at 171, that, even when, strictly speaking, there is no right at stake, there will be certain expectations which the law will protect, and which therefore are legitimate expectations. In Schmidt Lord Denning MR gave the example of “a foreign alien”:

“He has no right to enter this country except by leave: and, if he is given leave to come for a limited period, he has no right to stay for a day longer than the permitted time. If his permit is revoked before the time limit expires, he ought, I think, to be given an opportunity of making representations: for he would have a legitimate expectation of being allowed to stay for the permitted time.” (Emphasis in original)

[49]Another example that readily comes to mind is that, if a licence to carry on a certain activity is revoked before the end of its term, the duty to act fairly may be implied by law. It has been suggested that there may be some residual duty to act fairly if the case is one where a licence is not renewed at the end of its term, or perhaps even if it is refused for the first time: see the classification in McInnes v Onslow-Fane

[1978] 1 WLR 1520

, at 1528-9 (Sir Robert Megarry V-C), of forfeiture cases, expectation cases and application cases. However, it should be noted that, in R v Devon County Council, ex p. Baker

[1995] 1 All ER 73

, at 90, Simon Brown LJ (as he then was) expressed his belief that such “earlier attempted expositions” as in McInnes had been superseded by Lord Diplock’s analysis in CCSU (above) at p.408.

(i) a decision which affects someone:

“by depriving him of some benefit or advantage which … he has in the past been permitted by the decision-maker to enjoy and which he can legitimately expect to be permitted to continue to do until there has been communicated to him some rational grounds for withdrawing it on which he has been given an opportunity to comment …”

[50]In Simon Brown LJ’s classification scheme, Lord Diplock’s class b(i) corresponded to what he called a “category 2 interest.” At p.90 Simon Brown LJ said that:

“the only touchstone of a category 2 interest emerging from Lord Diplock’s speech is that the claimant has in the past been permitted to enjoy some benefit or advantage. Whether or not he can then legitimately expect procedural fairness, and if so to what extent, will depend upon the court’s view of what fairness demands in all the circumstances of the case. That, frankly, is as much help as one can get from the authorities.”

[51]As will become apparent, authority since then does provide more help. However, I will first consider a decision of this Court which was mentioned in Baker as an example of this kind of case (without doubting its correctness) and on which the claimant relied: R v Rochdale MBC, ex p. Schemet

[1994] ELR 89

(Roch J, as he then was).

[52]The facts of that case were as follows. The applicant and his wife had two children, one 14 years of age and the other 12. They were active members of the Church of England and regularly attended their local parish church with their children. They deposed in evidence before the Court that they wanted their children to receive secondary education in a Church of England school. There was no school within the respondent’s area which offered secondary education at a Church of England school. However there was a Church of England secondary school in another borough, Oldham, whose district adjoined that of the respondent. It was situated approximately 4.55 miles by way of the shortest available route from the applicant’s home.

[53]In 1988 the applicant’s daughter was offered a place there and started to attend that school in September 1989. In 1990 the applicant’s son was also offered a place at the same school and started there in September 1991.

[54]The respondent paid for the daughter’s travel to and from school by providing a pass usable on normal bus services. It ceased to pay these travelling expenses at the end of the academic year in July 1991. It had never paid such travelling expenses for the applicant’s son.

[55]The respondent had a policy in relation to travel expenses for children attending schools. The policy was modified during the 1980s and by August 1987 the general policy was that, if a parent arranged for a child to attend a school which was not maintained by the respondent, the respondent would not pay travelling expenses even if the school was the nearest suitable school. By exception, however, the authority would pay travelling expenses if the child was attending an extra-district school in order to receive education of a denominational character not available for pupils of his age group within the authority, provided that the distance from the home to the school was more than two miles, where the child was under the age of 11, and more than 3 miles, where the child was over the age of 11. It was under that policy that the applicant’s daughter received travelling expenses for the first two years she was at her school.

[56]The respondent’s policy was changed from August 1990, with the consequence that the applicant’s children were no longer eligible for travelling expenses to be paid. It was common ground that the respondent authority did not consult with any parents or body prior to taking the decisions in question. It was accepted on behalf of the applicant that the respondent had made no promise or given any assurance in the case of their son. However, it was submitted that the applicant and his wife had a legitimate expectation in respect of their daughter that her travelling expenses would continue to be paid. Roch J held that the duty of consultation was not confined to cases where there had been a promise or past practice of consultation. He held, at p.108, that the applicant had had a legitimate expectation that the travel passes would continue until there had been communicated some rational grounds for withdrawing them on which they had been given an opportunity to comment. Roch J was of the view that there could well be cases where the withdrawal of a travel pass would mean that the child in question would have to change schools and “it would seem right and sensible that the local education authority should pay some regard to the effect that a change of school would have on that particular child before finally deciding whether to withdraw that advantage.” Accordingly, it was held that the respondent had acted unlawfully in discontinuing travel expenses for the applicant’s daughter without consulting her parents.

[57]The claimant in the present case also placed reliance on a more recent decision of this Court, R (Luton Borough Council and others) v Secretary of State for Education

[2011] LGR 553

, in which Holman J had to consider the lawfulness of the Government’s decision to end a national programme called ‘Building Schools for the Future’, which aimed over a 15-year period until 2020 to build or refurbish every secondary school in England. At para. 83 Holman J said:

“As well as, but distinct from, substantive legitimate expectations, the law recognises a discrete form of procedural legitimate expectation which may raise a duty on the decision-maker to consult before taking the step or decision. It is easy to visualise many situations in which a person or body cannot legitimately expect any particular outcome, but may nevertheless have a strong entitlement to be consulted before the outcome is decided upon. ….”

[58]In the search for the governing principle, Holman J expressed the view, at para. 85, that “the jurisprudence does…make itself reasonably clear and it is not necessary to look beyond the decision of the Court of Appeal in R (Bhatt Murphy (a firm)) v Independent Assessor

[2008] EWCA (Civ) 755

. …”

[59]In Bhatt Murphy, at para. 41 Laws LJ said as follows:

“…a public authority will not often be held bound by the law to maintain in being a policy which on reasonable grounds it has chosen to alter or abandon. Nor will the law often require such a body to involve a section of the public in its decision-making process by notice or consultation if there has been no promise or practice to that effect. There is an underlying reason for this. Public authorities typically, and central government par excellence, enjoy wide discretions which it is their duty to exercise in the public interest. They have to decide the content and the pace of change. Often they must balance different, indeed opposing, interests on a wide spectrum. Generally they must be the masters of procedure as well as substance; and as such are generally entitled to keep their own counsel. All this is involved in….the entitlement of central government to formulate and re-formulate policy. This entitlement - in truth, a duty – is ordinarily repugnant to any requirement to bow to another’s will, albeit in the name of a substantive legitimate expectation. It is repugnant also to an enforced obligation, in the name of a procedural legitimate expectation, to take into account and respond to the views of particular persons whom the decision-maker has not chosen to consult.”

[60]However, at para. 42, Laws LJ continued:

“But the Court will (subject to the overriding public interest) insist on such a requirement, and enforce such an obligation, where the decision-maker’s proposed action would otherwise be so unfair as to amount to an abuse of power, by reason of the way in which it had earlier conducted itself. In the paradigm case of procedural expectations it will generally be unfair and abusive for the decision-maker to break its express promise or established practice of notice or consultation. In such a case the decision-maker’s right and duty to formulate and re-formulate policy for itself and by its chosen procedures is not affronted, for it must itself have concluded that interest is consistent with its proffered promise or practice. In other situations – the two kinds of legitimate expectation we are now considering – something no less concrete must be found. ….what is fair or unfair is of course notoriously sensitive to factual nuance. In applying the discipline of authority, therefore, it is as well to bear in mind the observation of Sir Thomas Bingham MR as he then was in [R v Inland Revenue Commissioners, ex p. Unilever plc [1996] STC 681, at 690F], that ‘[t]he categories of unfairness are not closed, and precedent should act as a guide, not a cage.’”

[61]In the Bhatt Murphy case, at para. 47, Laws LJ cited the Schemet case but noted that “the affected persons were few in number” and that “it might be thought that the decision was a generous one.” However, Laws LJ did not overrule or doubt the correctness of the decision in Schemet.

[62]At para. 49 Laws LJ said in respect of this kind of case, which he described as “the secondary case of legitimate expectation” or “the secondary case of procedural expectation”:

“I apprehend that the secondary case of legitimate expectation will not often be established. Where there has been no assurance either of consultation (the paradigm case of procedural expectation) or as to the continuance of the policy (substantive expectation), there will generally be nothing in the case save a decision by the authority in question to effect a change in its approach to one or more of its functions. And generally, there can be no objection to that, for it involves no abuse of power…accordingly for this secondary case of procedural expectation to run, the impact of the authorities past conduct on potentially affected persons must, again, be pressing and focussed. One would expect at least to find an individual or group who in reason who have substantial grounds to expect that the substance of the relevant policy will continue to enure for their particular benefit: not necessarily forever, but at least for a reasonable period, to provide a cushion against the change. In such a case the change cannot lawfully be made, certainly not made abruptly, unless the authority notify and consult.”

[63]At para. 58 Laws LJ rejected what he regarded as a “wide” and “ambitious” submission which was made in reliance upon Schemet. The submission was that a beneficiary of a public authority’s policy enjoys a legitimate expectation that the policy will continue in being until rational grounds for its withdrawal have been communicated to him and he has been given an opportunity to comment. Laws LJ said:

“I can understand how so ambitious an argument might be got out of ex parte Schemet, in which, with respect to Roch J, the boundaries of this kind of legitimate expectation are not uncovered. But in my judgment ex parte Schemet does not vouchsafe anything like so wide a proposition as that contended for…and, if it did, that would in my judgment amount to a grave error. The secondary class of procedural expectation denotes an exceptional case. It runs, as I have said, where the impact of the authority’s past conduct on potentially affected persons is pressing and focussed, and in reason such person or persons have substantial grounds to expect that the substance of the relevant policy will continue to enure for their particular benefit. There is nothing of the kind here.”

[64]This is an appropriate juncture to return to the Luton case, in which, as I have already noted, Holman J had the advantage of considering at some length the judgment of Laws LJ in Bhatt Murphy. At paras. 92-96 of his judgment, Holman J carried out a detailed and close analysis of the facts of the Luton case: as he observed at para.. 92, it is necessary in such cases to look at the specific facts, using precedent as a guide and not as a cage (echoing both Sir Thomas Bingham MR in the Unilever case and Laws LJ in the Bhatt Murphy case). He concluded on the facts of that case that there had been a breach of the duty of consultation: see in particular paras. 94 and 96.

[65]The difference between a case like Schemet or Luton on the one hand, and Bhatt Murphy on the other, is that, in the former type of case, there is a particular individual or small, identifiable class of persons who are directly affected by the decision under challenge. Furthermore, although the source or origin of that decision is a change of policy by a public authority, it is not the change of policy itself that the claimant is entitled to complain about but its application to a particular claimant who has a legitimate expectation that a benefit or advantage will continue but which is now being withdrawn. This is because there is an element of retrospectivity in such a case. If a public authority simply changed its policy for the future, it is doubtful that anyone could complain about lack of consultation. However, if a particular person or small class of identifiable persons have enjoyed a benefit or advantage under the previous policy, they may, depending on the circumstances, have a claim to procedural fairness before the decision is made to apply the new policy to them and so to withdraw or discontinue that benefit or advantage.

[66]Returning to the facts of the present case, as counsel for the claimant submitted, the defendant’s decision fundamentally altered the nature of the commitment which had previously been made by the Secretary of State to fund capital projects. As the earlier summary of the facts demonstrates, the claimant did not necessarily want the declining balance basis in 1999. It pointed out at that time that the declining balance basis was not well-suited to short-term contracts such as ICT projects. However, that was the only basis available at that time. The declining balance basis of payment of PFI grants was intrinsically one which meant that the timescale for incremental payments towards the capital cost of a project would be much longer than the period of a particular contract with a third party and, in principle, could last 100 years or more.

[67]Additionally, by the time that an alternative basis, the annuity basis, was made available in 2004, the claimant chose to stay on the declining balance basis. From that offer of a choice it could legitimately expect that it would continue to be funded on that basis and not have a new policy applied even to its existing arrangements. Furthermore, one reason why it made sense for the claimant to stay with the declining balance basis was that, in the meantime, it had had to find alternative sources of funding since the PFI grant it received during the term of the contract (even with a two year extension in 2009-11) did not fully cover the capital cost of the project.

[68]The present case is one where, to use Laws LJ’s phrase in Bhatt Murphy, the impact on the claimant was indeed “pressing and focussed.” There was a small and limited class of local authorities that were affected by the defendant’s decision as many had already changed to the annuity basis in 2004. Furthermore, it is in this context that what happened in 2004, when there was consultation, is of some relevance. Although I have already held that I do not regard that as amounting to a past practice of consultation, it is of some significance because it shows that the defendant himself had recognised that consultation was appropriate and possible in relation to decisions of this kind. Moreover, the defendant purported to carry out a consultation in the present case (a point to which I will return as there was a dispute as to whether it was adequate and lawful). This shows that there was no overriding public interest to justify not consulting.

[69]To make the decision abruptly without consultation would, in the circumstances of the present case, be so unfair as to amount to an abuse of power. Accordingly, in my view, the defendant did owe a duty to act fairly, and in particular to consult the claimant, before he made the decision under challenge in this case. I turn therefore to the question whether, on the facts of the present case, that duty was complied with.

(b) The requirements of a lawful consultation

[70]The well-known requirements for a lawful consultation were set out by Webster J in Rv Brent London Borough Council, ex p. Gunning

(1985) 84 LGR 168

in a passage that was approved by the Court of Appeal in R v North and East Devon Health Authority, ex p. Coughlan

[2001] QB 213

, at para. 108. As Lord Woolf MR, who gave the judgment of the Court, said in Coughlan:

“To be proper, consultation must be undertaken at a time when proposals are still at a formative stage; it must include sufficient reasons for particular proposals to allow those consulted to give intelligent consideration and an intelligent response; adequate time must be given for this purpose; and the product of consultation must be conscientiously taken into account when the ultimate decision is taken…”

[71]The requirement that consultation must be undertaken at a time when proposals are at a “formative” stage was considered further by Owen J in Royal Brompton and Harefield NHS Foundation Trust v Joint Committee of Primary Care Trusts and another

[2011] EWHC 2986 (Admin)

, at para. 16:

“The requirement that consultation must be at a time when proposals are at a formative stage can be expressed as a requirement that the decision maker has not pre-determined the issue upon which he goes out to consultation, i.e. that he has an open mind. That said … to have an open mind does not mean an empty mind.”

As Owen J observed at paras. 18 to 21, it is well-established that an authority can have a “preferred option” and proceed to consult upon that option. As the authorities cited in that passage by Owen J show, the fact that a public authority may have come to a “provisional view” or has a “preferred option” does not prevent a consultation exercise being conducted in good faith at a stage when the policy is still “formative in the sense that no final decision has yet been made…”: see in particular Sardar and others v Watford Borough Council

[2006] EWHC 1590 (Admin)

, at para. 29 (Wilkie J).

[72]The defendant contended that, even if the duty to act fairly did apply in this case, he had discharged it. I do not accept that contention. In my judgement, it is clear from the evidence before the Court that the defendant did not consult the claimant at a formative stage of the decision-making process, even having regard to the authorities to which I have referred to the effect that a decision-maker is entitled to have a provisional view or preferred option before embarking on consultation. In my view, the crucial question in this case was whether the change in policy should apply even to the claimant in spite of the particular history of this case going back to 1998 and including the choice that had been offered, and taken up, by the claimant in 2004. The letter of 10 January 2011 announced that it had been decided that it would. Although, towards the end, that letter did offer to consider any representations that the claimant might wish to make, when read fairly and as a whole, the letter was inviting representations as to how the impact of the decision might be mitigated in the claimant’s case, but not about the principle of the decision itself.

[73]Furthermore, although the evidence indicates that there was then “consultation” as referred to by the defendant in the period until 10 February 2011, this was not, in my judgement, at a formative stage. For example, there were meetings at which the claimant’s representatives attended and there was consideration given to the letter from Councillor Millward. However, these came after the event and not before. That was inconsistent with one of the fundamental requirements of a lawful consultation.

[74]The claimant therefore succeeds on its ground based on procedural fairness. I will return to the question of remedies at the end of this judgment.

Ground (2): Substantive legitimate expectation

[75]The claimant submitted that, quite apart from procedural fairness, it had a substantive legitimate expectation that it would continue to be paid on the declining balance basis and that this was breached by the defendant. The claimant submitted that the defendant’s conduct was so unfair as to amount to an abuse of power in this respect. I am unable to accept those submissions for reasons which echo those given in the Luton case.

[76]In the Luton case, at para. 79, Holman J said:

“….the law recognises that public bodies, and especially central government, must enjoy a wide discretion to change policies from time to time to reflect their conception of the public interest. ‘The liberty to make such changes is something that is inherent in our constitutional form of government’ (see Hughes v Department for Health and Social Security [1985] IRLR 263, at 267 (para. 23) per Lord Diplock). This must be especially so in the case of a different political party taking power after a general election and in the immediate aftermath of that election.”

[77]Furthermore, at paras. 80-81, Holman J accepted submissions made by counsel for the Secretary of State in that case. In particular he accepted the submission that governments may change at general elections, and even if there is an expectation that a given government will carry through its policies and assurances, there can be no legitimate expectation that a later and politically different one will do so, absent the kind of binding commitment that a promissory note contains. He also accepted the submission that:

“It was plainly implicit that the delivery of a project of such a scale, duration and ambition [as BSF] would always be conditional upon the availability of the requisite finance and the policy decisions of the government of the time. Had it been otherwise the present government’s predecessor would have been guilty of unlawfully fettering a successor government.”

[78]There are similar views expressed by Laws LJ in the Bhatt Murphy case, at para. 41, which I have already cited. It seems to me that such views reflect important constitutional principles as to the proper role of the courts in our democratic society and have particular resonance in the context of public finances, in which the Crown is responsible to the House of Commons in particular.

[79]These general considerations are reinforced in the present context by particular features of this case. As I have already said, the declining balance basis of payment could, in principle, last for 100 years or more. I cannot see how any government could reasonably be considered to be binding its successors in that way in the absence of something equivalent to a promissory note.

[80]Furthermore, there is evidence before the Court that the government was not seeking to bind itself for the future, let alone successor governments. At the hearing before me the defendant placed reliance upon a document issued in June 1998 on ‘The PFI revenue support arrangements for 1998/99: Guidance for authorities’. This stated at paras. 1 and 2 as follows:

“The purpose of this guidance note is to explain how the Government intends to provide revenue support during 1998/99 to local authority Private Finance Initiative (PFI) projects which have been endorsed by the Project Review Group (PRG), and which start to make service payments under their contract in that year. It gives practical guidance on the mechanism to be used for the payment of Special Grant to new projects, and explains how this support will feed through into Revenue Support Grant (RSG) in subsequent years. Under the Local Government Finance Act 1992, RSG is calculated on an annual basis. It is not therefore possible to commit Ministers to a particular methodology for the calculation of RSG in the future. However, this note sets out Ministers’ present intentions.”

[81]As that note makes clear, and as is also clear from other evidence before the Court, the payments of grant in this case were made on an annual basis. This is what one would expect in the context of decisions by the central government as to the nation’s finances. There was no commitment, guarantee or assurance as to future years.

[82]In all the circumstances of this case, I find it impossible to spell out of the evidence the substantive legitimate expectation that the claimant needs in order to support this ground of challenge.

Ground (3): Rigid and inflexible application of policy

[83]The claimant contended that the defendant had applied his policy in a rigid and inflexible way and so acted unlawfully. It is a well-established principle of public law that a decision-maker is entitled to have a policy to govern the exercise of a discretionary power but must not apply that policy in a way which admits of no possible exceptions.

[84]The principle was set out in classic terms by Lord Reid in British Oxygen Co. Ltd. v Minister of Technology

[1971] AC 610

, at 625:

“The general rule is that anyone who has to exercise a statutory discretion must not ‘shut his ears to an application’ [citing R v Port of London Authority, ex parte Kynoch Ltd [1919] 1 KB 176, at 183, per Bankes LJ] … I do not think there is any great difference between a policy and a rule. There may be cases where an officer or authority ought to listen to a substantial argument reasonably presented urging a change of policy. What the authority must not do is refuse to listen at all. But a Ministry or large authority may have had to deal already with a multitude of similar applications and then they will almost certainly have evolved a policy so precise that it could well be called a rule. There can be no objection to that, provided the authority is always willing to listen to anyone with anything new to say – of course I do not mean to say that there need be an oral hearing.”

[85]I do not accept this ground of challenge by the claimant. In my judgement, the defendant was prepared to consider the claimant’s representations and consider making an exception to his policy. Although I have held that the defendant did not consult the claimant at a formative stage, I do accept the defendant’s submission that, on the evidence before the Court, he was prepared to consider what the claimant said to him after the decision had been taken, e.g. by taking into account the letter by Councillor Millward of 13 January 2011. As the correspondence on behalf of the defendant, which I have summarised earlier, makes clear, the points made in that letter were considered by ministers at the defendant’s department before the decision under challenge was taken on 19 April 2011.

Ground (4): Error of fact

[86]The claimant submitted that the letter of 10 January 2011 on behalf of the defendant contained an error of fact in that its author was under the impression that the “project” had ended in 2009, when in fact it was only the first contract for DGFL which expired then. Accordingly, it was submitted that either the defendant proceeded on the basis of an error of fact or, putting the same point in another way, he had failed to take into account relevant facts.

[87]I do not accept this ground of challenge. Even if the error of fact was present at the time of the letter of 10 January 2011, things did not remain static until the decision under challenge in these proceedings, which was dated 19 April 2011. In the meantime, the claimant informed the defendant of the apparent error: see the letter by Councillor Millward dated 13 January 2011 and the reply by Michael Oliver dated 3 February 2011, which made it clear that ministers would be considering the points made by her. By the time of the decision under challenge the evidence in this case read as a whole demonstrates that the defendant was well aware of the true state of affairs, including the extension of the first contract by DGFL 2 in 2008 and the negotiation of DGFL 3 in 2010-2011.

Ground (5): Breach of Public Sector Equality Duty

[88]The principles on the nature and scope of the Public Sector Equality Duty in section 149 of the Equality Act 2010 are now well-known and can conveniently be found in the judgment of Wilkie J in R (Williams) v Surrey County Council

[2012] EWHC 867 (Admin)

. At para. 16 Wilkie J summarised those principles in a series of paragraphs numbered(i) to (xiv). Of particular importance in the current case are the following (using Wilkie J’s numbering):

(ii) “Due regard” is the regard that is appropriate, in all the particular circumstances in which the public authority concerned is carrying out its function as a public authority. The public authority must also pay regard to any countervailing factors. The weight to be given to the countervailing factors is a matter for the public authority concerned rather than the Court, unless the assessment by the public authority is unreasonable or irrational. … (v) The due regard duty must be fulfilled before and at the time that a particular policy … is being considered by the public authority. It involves a conscious approach and state of mind. It must be exercised in substance, with rigour and with an open mind. It is not a question of ticking boxes…. (x) The clear purpose of [section 149] is to require public bodies to give advance consideration to the issue of … discrimination before making any policy decisions that may be affected by such an issue. This is a salutary requirement which must be seen as an integral part of the mechanisms for ensuring the fulfilment and aims of anti-discrimination legislation. It is not possible to take the view that non-compliance is not a very important matter. … (xi) Due regard must be an essential preliminary to any important policy decision, not a rearguard action following a concluded decision…”

[89]The evidence in relation to this ground is set out in the witness statement of Rosemary Porter, the Acting Director of Children’s Services with the claimant authority. She describes the profile of the population in the claimant’s area, in particular the number of children with disabilities or special needs and those from ethnic minority communities. She expresses the concerns which the claimant has about the possible detrimental impact on such groups (and on boys as compared with girls) of the defendant’s decision in relation to the funding of ICT in the area. A summary of those concerns can be found at para. 19 of her statement, where she says:

“The Government’s decision to terminate funding has put the future of DGFL in grave doubt. The withdrawal or scaling down of DGFL puts all the initiatives and improvements I have described … at risk. Whatever replaces DGFL … will affect all pupils but …those with disability, special need or from an ethnic minority group are likely to feel the impact more.”

[90]On behalf of the claimant it was submitted that there is no evidence which has been filed on behalf of the defendant to contradict what is said in that statement. What Mr Garrity says about this issue at para. 90 of his witness statement is this:

“The Department did not undertake an Equalities Assessment in respect of its decision to change from declining balance payments to annuity payments as it was still proposing to fund in full the agreed supported capital investment for the approved PFI projects in question, and indeed has done so. The Secretary of State recognises his duty to comply with s.149 of the Equality Act when discharging his functions, including as to budget allocations in the next spending review period starting in 2015.”

[91]In this context the claimant placed particular reliance on the Luton case (above). In that case Holman J held that there had been a breach of the public sector equality duties as they then stood before the 2010 Act (it has not been suggested in the present case that there was any material difference in the new legislation). However, the issue in that case was not as to the existence or applicability of the relevant duties but rather whether the Secretary of State had done enough on the facts of the case to comply with those duties. For example, at para. 105 it was recorded by Holman J that counsel for the Secretary of State had submitted that the Secretary of State personally was well aware of his duties and did have due regard to the required matters. Furthermore, at para. 108 it was recorded that evidence filed on behalf of the Secretary of State showed that he was aware that his decisions could have a differential impact on different protected groups. For example he was well aware that a number of BSF projects related to special schools whose pupils would ordinarily fall within the definition of “disabled” and that newly built schools would generally produce facilities which were more accessible to disabled pupils. He was also aware that a number of the projects were situated in areas with significant populations of ethnic minority pupils. On the facts before him Holman J found there to have been a breach of the equality duties: see paras. 110 to 116.

[92]I do not consider that there is an analogy to be drawn between the Luton case and the present case. In the present case the existence of the duty is in dispute. The Secretary of State does not accept that any particular detrimental consequence for any protected group will or might flow from the Secretary of State’s decision in this case.

[93]I accept the defendant’s submissions in relation to this ground of challenge. As the authorities have frequently stressed, what is “due regard” is such regard as is appropriate in all the circumstances. In my judgement, the defendant was not required to have regard to the matters set out in section 149 of the Equality Act for two main reasons.

[94]First, the suggested impact is a contingent and indirect one. The defendant’s decision was a financial one. It will frequently be the case that the central government makes financial decisions of a general kind which leave up to individual local authorities the manner of their implementation. The relevant authorities may have a choice about whether they cut or reduce a particular service or how they find alternative funding for it if they feel that service should continue. The local authority concerned may well have to perform the Public Sector Equality Duty itself before it decides which of various courses it should take in order to implement the financial decision of the central government.

[95]Secondly, and in any event, the defendant was entitled to take the view that he did, that the detrimental consequences which the claimant suggests would flow from the decision under challenge are not only contingent but lie some years ahead in the future, given the funding that the defendant has made available to the claimant until 2015. The defendant’s simple submission was that, in those circumstances, the duty may arise in 2015 but cannot be said to have arisen now. There are too many vicissitudes in life for a court to be able to say that the defendant has breached the Public Sector Equality Duty as things stand at present. I accept that submission by the defendant.

Conclusion

[96]For the reasons I have given, this claim for judicial review is granted to the extent that I accept the claimant’s ground of challenge based on procedural fairness. I will consider the parties’ submissions as to the appropriate remedy.